Under traditional regulation, water utilities profit by increasing their sales and thus have a disincentive to promote conservation. Severing the connection between water utilities’ revenues and the quantity of water they sell, a system known as “revenue decoupling,” offers opportunities to solve this problem. However, revenue decoupling has limitations and raises some concerns. First, decoupling by itself is not a conservation program, and must be supplemented with additional conservation efforts such as appropriate increasing block rate (IBR) pricing structures. Second, decoupling alters the risks that both utilities and ratepayers face. Third, water users may perceive a “conservation penalty” if their rates increase when their consumption decreases. Despite these and other challenges, revenue decoupling is a powerful tool to promote conservation and should be expanded. Regulators should also study the long-term conservation incentives that the policy creates.INTRODUCTION The finite nature of California’s water resources has made water conservation an important policy goal. Utilities are often in the best position to implement conservation programs, but traditional regulation of investor-owned utilities (IOUs) rewards utilities for selling more water and punishes them for selling less. Thus, the current regulatory regime provides a disincentive to adopt conservation measures. Water revenue decoupling can remove this disincentive. Decoupling allows IOUs to track any revenue losses due to customers using less water than they were forecasted to use and adjust future rates to recoup those losses. Since mid-2008, the California Public Utilities Commission (CPUC) has been conducting decoupling pilot programs with several water IOUs.1 In concert with this program, the participating IOUs have implemented conservation pricing rate structures. Decoupling can remove the deterrent to conservation that utilities face under the traditional regulatory regime. However, before it is widely implemented, regulators must address several concerns:

Decoupling itself is not a conservation program; it only removes a disincentive to conservation. Robust conservation efforts must also be in place for the conservation policy goal to be achieved.

The mechanics of decoupling can lead to a perceived conservation penalty: when customers as a whole conserve water, their rates increase.

Because regulators are unable to distinguish sales losses due to conservation efforts from sales losses from other causes, IOUs with decoupling are compensated for non-conservation revenue losses as well.

If IOUs’ allowed cost of capital is not adjusted for the decrease in their revenue risk caused by decoupling, ratepayers will be compensating the IOUs for revenue risks that they no longer bear.

In this paper, we will explain how traditional rate-of-return regulation in the water sector leads to the throughput incentive, how the throughput incentive discourages conservation, and how decoupling addresses the throughput incentive. We will also examine some of the concerns we have with decoupling.WATER CONSERVATION IS AN IMPORTANT POLICY GOAL IN CALIFORNIA

From 2007 to 2009, California suffered a significant drought.2 Some water utilities, such as the East Bay Municipal Utility District, imposed mandatory rationing.3 Estimated impacts of the drought include up to $477 million in farm revenue losses and up to 23,700 lost jobs.4 Among the effects of ongoing water shortages are reduced hydropower generation, increased risk of wildfires, and reduced vegetation, leading to an inability to graze cattle.5 Multiple circumstances including, but not limited to, climate change and population growth will only add to the imperative of sustainable water use. Conservation is an important aspect of sustainable water use. The California State Legislature recently passed the Water Conservation Act of 2009 (SBx7-7). Chapter Three of the Act mandates conservation goals for urban retail water suppliers, including an ultimate goal of 20 percent reduction in per capita urban consumption by 2020.6 Because of their close contact with customers and familiarity with water use patterns, utilities are well-positioned to implement water conservation efforts.TRADITIONAL REGULATION AND THE THROUGHPUT INCENTIVE Most IOUs are regulated monopolies, meaning that the government regulates the rates they charge their customers. In California, the CPUC regulates IOUs, which provide water to approximately 20 percent of California residents.7 The CPUC approves rates for each Class A water IOU (defined as those serving more than 10,000 customers)8 every three years in a general rate case. The CPUC also regulates rates for the smaller Class B, C, and D water IOUs.9 Roughly speaking, rates are set by dividing a utility’s projected costs by its projected sales volume. The utility is allowed to cover all of its costs through rates, including the cost of providing a fair return on its capital investments. Normally, water rates consist of a fixed monthly service charge as well as a quantity charge paid for each unit of water a customer uses. Until recently, the CPUC’s standard practice was to allow a water utility to recover all of its variable costs and 50 percent of its fixed costs through the quantity charge, and to recover 50 percent of its fixed costs through the service charge.10 Variable costs are costs that change in the short term due to increases or decreases in water sales. They include purchased power, purchased water, and any pump taxes paid to pump groundwater. Fixed costs are all other costs, including the utility’s adopted return on its capital investment. Traditional regulation gives the utility an incentive to sell more water.11 In the energy industry, this is known as the “throughput incentive.”12 In this article we use the same term in reference to water utilities as well. Because the quantity charge the utility collects from its customers for each unit of water sold includes 50 percent of its fixed costs in addition to its variable costs, and only the variable costs increase when water sales increase, the utility may increase its profits between rate cases by selling more water than it was forecasted to sell in the last rate case. Conversely, in most cases the utility will lose money if it sells less than its sales forecast. For a numerical example of this, see Box 1.

CONSERVATION AND TRADITIONAL REGULATION The throughput incentive aligns a utility’s incentives contrary to the public policy goal of water conservation. This misalignment is particularly troubling because utilities are often the actors best-positioned to promote conservation. Conservation strategies can be divided into price strategies and non-price strategies. Non-price strategies include the promotion of efficient equipment such as low-flow toilets and faucets, the promotion of low-impact landscaping, and water use restrictions such as voluntary reduction of lawn watering.13 Non-price strategies are often implemented by water utilities, but can also be implemented by other entities. In several states, organizations separate from utilities have been established to promote energy conservation. These entities are funded through charges on customers’ utility bills, but are independent of utilities, meaning they are not influenced by the throughput incentive.14 However, in California at this time, water utilities are charged with implementing ratepayer-funded conservation programs. This has advantages because the utilities already administer the rate structure and because they have an ongoing relationship with customers. Price strategies for conservation involve increasing the marginal cost of water consumption to customers. This can be done by increasing the portion of revenues the utility collects through the quantity charge as opposed to the monthly service charge. The California Urban Water Conservation Council recommends that for conservation pricing, the utility should collect at least 70 percent of its total revenues from the quantity charge.15 Increasing block rates (IBRs), a form of conservation pricing, charge customers a rising quantity charge for use beyond certain thresholds. For instance, an IBR structure might charge $5 for each of the first five units used, $7 for each of the next five units, and $10 for each unit past ten. One concern with imposing higher marginal rates is that it tends to make utility revenues more volatile.16 With high marginal rates, failing to reach the sales forecast results in even greater revenue losses for the utility than under a uniform rate design. Conversely, sales above the forecast would likely result in an even greater revenue increase. For these reasons, when California water IOUs implemented IBRs without full decoupling, the CPUC approved a price adjustment mechanism that ensures that the utilities collect the same amount of revenue under IBRs that they would have collected with the same sales under a traditional uniform rate structure. For instance, if sales go down and the utility loses more revenues under the IBR rate design than it would have under a uniform rate structure, it is allowed to recover the additional loss by adding a surcharge to future rates. While the price adjustment mechanism decreases the revenue volatility associated with conservation pricing, it does not adjust for changes in sales volume and thus does not remove the throughput incentive. It may be possible to implement both price and non-price conservation strategies despite the utility’s throughput incentive, but it would not be easy. In addition to the throughput incentive, utilities are frequently in the best position to promote water conservation.17 Separate entities created to promote conservation may not be as effective as utilities could be with the right incentives.REVENUE DECOUPLING TO REMOVE THE THROUGHPUT INCENTIVE Revenue decoupling severs the connection between the utility’s revenues and the quantity of water or energy it sells. The utility is made whole (reimbursed) for net revenue losses due to not reaching its sales forecast and must repay excess net revenues it receives from selling more than the forecast. As of 2007, ten states had approved decoupling for at least one energy utility.18 In 2008 and 2009, in order to pursue the conservation goals laid out in its 2005 Water Action Plan,19 the CPUC approved conservation rate designs and revenue decoupling pilot programs for several Class A water utilities.20 The CPUC’s water revenue decoupling mechanism is made up of a Water Revenue Adjustment Mechanism (WRAM) and a Modified Cost Balancing Account (MCBA). “The WRAM tracks differences between the amount of revenues the CPUC expects the utility to collect through the quantity charge (‘adopted quantity charge revenues’) and the amount the utility actually collects. The MCBA tracks differences between the variable costs the CPUC expects the utility to incur (‘adopted variable costs’) and the variable costs the utility actually incurs.”21 When the WRAM and MCBA are added together, the net balance reflects how much the utility under- or over-collected due to selling less or more water than expected.22 Normally, in the event that the utility undersells, the net WRAM/MCBA balance will represent an under-collection of revenues equal to the revenues the utility missed out on, minus the variable costs it avoided because it sold less water.23 If the utility oversells, the WRAM/MCBA balance will normally represent an over-collection equal to the additional quantity revenues the utility collected minus the additional variable costs it incurred in order to sell more water. The WRAM/MCBA balance accumulates each month until the next rate case or until it reaches a certain threshold (for example, 2 percent of the utility’s total adopted revenues), at which point it is amortized into future rates. If the balance is an over-collection, it is refunded to customers through a credit that reduces the quantity charge on their future water bills. If the balance is an under-collection, it is charged to customers through a surcharge that increases the quantity charge on their future water bills. For a numerical example of how the WRAM/MCBA mechanism addresses the throughput incentive, see Box 1.INITIAL EXPERIENCES WITH CPUC WATER DECOUPLING Since no California water utility has had revenue decoupling for even four full years thus far, and only a few years of data are currently available for analysis, it is too early to determine the effects of the mechanism. However, preliminary observations can be made. In 2009, water utilities with decoupling experienced under-collections in the net balance of the WRAM/MCBA, which resulted in surcharges to customers. Overall under-collections for each utility ranged from 4 to 11 percent of 2009 company-wide revenues depending on the utility.24 Averaging across twenty-one of its districts, California Water Service Company (“Cal Water”), the state’s largest water IOU, recorded a net WRAM/MCBA under-collection of $12.1 million in 2009, or 4.4 percent of adopted quantity-charge revenues. Quantity-charge revenues were $21.4 million (7.8 percent) below the adopted amount in 2009, but that was partially offset by actual variable costs being $9.26 million (6.1 percent) below adopted variable costs.25 Because of the national economic downturn and a drought in California, it is unknown how much of the reduction in water sales was due to conservation efforts. Reduction in water sales could also have been caused by economic factors like reduced consumer income, loss of customers due to home foreclosures, or slower-than-anticipated customer growth due to slowed construction of new homes.CONCERNS ABOUT DECOUPLING We have several concerns about decoupling. First, decoupling allows utilities to recover lost revenues whether or not conservation is the reason for the loss. Second, decoupling itself is not a conservation program. Thus, conservation programs and rate designs must be adequate to meet policy goals even if decoupling is in place. Third, decoupling may not remove utilities’ long-term incentives to increase sales in order to build the size of their business.Decoupling and risk By reducing utilities’ revenue volatility and adjusting water rates, decoupling affects both utility and ratepayer risk. Decoupling clearly reduces utility risk, which should be reflected by an adjustment to utilities’ allowed cost of capital. Although some of the risk avoided by utilities may be transferred to consumers, decoupling may also reduce some forms of consumer risk.Decoupling Reduces Utility Risk Decoupling decreases risk for utilities. In addition to removing the short-term throughput incentive and protecting the utility from increased revenue volatility due to conservation rate designs, it also diminishes risk that is present regardless of conservation practices, referred to here as traditional risk. Two examples of traditional risks that utilities no longer face under decoupling are risks due to economic recessions and above-average rainfall, both of which tend to reduce water consumption and, consequently, utility revenues. Decoupling surcharges are designed to make the utility whole for quantity-charge revenues lost for these reasons. Decoupling as implemented by the CPUC effectively removes most of the revenue volatility due to all sales fluctuations, regardless of the cause of those fluctuations, and therefore decreases the utility’s overall risk: the utility will receive its adopted quantity-charge revenues regardless of sales.The Effect of Decoupling on Ratepayer Risk Is Unclear Since surcharges and credits from decoupling affect ratepayers’ bills, decoupling will affect ratepayer risk as well as utility risk. However, not all of the risks that utilities avoid will necessarily be transferred to ratepayers. We see some ways in which decoupling could increase ratepayer risk and others in which it could decrease it. Decoupling could increase ratepayers’ risk of being adversely affected by utility customer loss. With no decoupling, when a utility misses its sales forecast because it loses customers, lost revenues come out of profits. Under decoupling, however, the utility is allowed to collect a surcharge in the future to compensate for the lost quantity-charge revenues. This surcharge results in increased rates for customers and, assuming customers do not change their water consumption, in higher water bills. On the other hand, if the utility sells more than its forecast because it unexpectedly gains customers, under decoupling it will pay back the excess quantity-charge revenues to customers through a credit, reducing customers’ bills. Assuming that an unexpected gain in customers is just as likely as an unexpected loss of customers, the average effect on utility bills will be zero. However, bills will become more volatile, leading to increased ratepayer risk. Decoupling could also increase ratepayers’ risk of being adversely affected by an economic recession. If the average ratepayer’s income decreases during an economic recession, she may reduce water consumption in order to save money. However, if all ratepayers respond similarly, the utility will not meet its sales forecast and will then compensate for the lost quantity-charge revenues with a surcharge, increasing water rates. Thus, when ratepayers are viewed in the aggregate, decoupling limits their ability to reduce their water bills during an economic recession even though they use less water, and it increases their risk of being adversely affected by a recession. On the other hand, decoupling could decrease ratepayer risk by reducing water bill variation caused by weather fluctuations. Dry, hot weather generally causes water consumption to go up, as customers use more water irrigating their lawns. Without decoupling, the utility sells more water, collects more quantity-charge revenue, and makes more money. The average ratepayer is faced with higher water bills. Under decoupling, however, the utility refunds the excess quantity-charge revenues to the ratepayer through a credit. When abnormally wet weather causes ratepayers to use less water, the reverse occurs. Without decoupling, the utility sells less water and makes less money, while customers enjoy lower bills. With decoupling, the utility collects lost quantity-charge revenues through a surcharge added to customers’ bills in the future. Again, assuming that wet weather and dry weather are equally likely to occur, in the long run the ratepayer pays the same amount and the utility collects the same amount with or without decoupling. However, decoupling reduces revenue volatility for the utility and reduces bill volatility for the ratepayer, thus reducing risk for both. One might ask how decoupling can reduce ratepayer risk when changes in water use are due to weather but increase ratepayer risk when changes in water use are due to an economic recession. In the case of an economic recession, the ratepayer changes her water use with the intent of reducing her water bill, but decoupling limits her ability to do so. In this case, decoupling prevents the ratepayer from varying her water bill to her advantage. With changes in use due to weather fluctuations, however, the ratepayer is forced to change water use due to weather patterns outside of her control. In this case, decoupling protects the ratepayer from variability in her water bill that she would prefer to avoid. Since there is a significant time lag between when revenue under- and over-collections occur and when decoupling surcharges and credits are imposed, the above descriptions of the effects of decoupling on water bills and bill stability are a considerable simplification of reality. For instance, even with decoupling, weather fluctuations will still cause water bills to go up and down over time. A customer will spend more on water in a dry year, but might not receive a decoupling credit until a year or two later. Nevertheless, while the customer’s bill will still rise and fall in the face of weather variability, decoupling will reduce variation in the total amount the customer pays for water over a period of several years. The above examples are not intended to be an exhaustive list of ways in which decoupling can affect ratepayer risk. They only serve to demonstrate that decoupling could increase certain aspects of ratepayer risk while decreasing other aspects. A quantitative analysis would be required to estimate the relative magnitudes of these effects on risk. Based on our limited qualitative analysis, we cannot conclude whether the net effect of decoupling is an increase or a decrease in ratepayer risk.Cost of Capital Reflects Risk Borne by Utility The cost of capital is the rate of return a utility must pay investors to borrow money. For one of their shareholders or bondholders, it is the opportunity cost of investing in a particular utility at a particular level of risk—i.e., the return they could expect to receive from another investment at the same level of risk.26 With the introduction of the WRAM/MCBA, revenue volatility and corresponding risk for the utility are significantly reduced. As a utility’s risk decreases, the amount it must pay to attract investors should also decrease. However, in practice this will not happen immediately and could take years. In the interim, the investors will receive the same rate of return even though some of the risk they previously faced has been transferred to ratepayers. The CPUC, which determines a utility’s allowed cost of capital (how much the utility is allowed to collect through rates to cover its capital costs), currently does not adjust the utility’s rate of return to account for decoupling. In a 2009 cost-of-capital decision, the CPUC acknowledged that decoupling reduces utility risk, but it did not adjust the allowed cost of capital because it could not “determine a precise adjustment to risk.”27 In the future, the CPUC could adopt a lower cost of capital for utilities that have decoupling. The lower cost of capital could decrease the rate that customers pay, in effect returning to them some of the benefits of the reduction in the utility’s risk.With Decoupling, CPUC Should Reduce Utilities’ Allowed Cost of Capital If decoupling removes a significant share of the utility’s traditional revenue risk, it is only logical to ask who, if anyone, assumes that risk. Is it transferred to ratepayers, or does it simply disappear? We conclude that a portion of the risk avoided by the utility is transferred to ratepayers, while another portion may simply be avoided, in a mutually beneficial advantage of decoupling. Furthermore, decoupling may reduce some forms of ratepayer risk. Regardless of what impact decoupling has on ratepayer risk, it clearly decreases utility risk and should therefore be associated with a reduction in the utility’s allowed cost of capital.

Perceived Conservation Penalty Another troubling consequence of decoupling is the perception of a “conservation penalty.” Surcharges implemented to recover revenues from sales lost due to conservation can be perceived as unfair to customers. An individual ratepayer who has made an effort to use less water will likely see these surcharges as a rate increase. Ratepayers could interpret the decoupling surcharge as a conservation penalty and lose motivation to conserve water.Decoupling Is Not a Conservation Program Regulators should keep in mind that decoupling only removes a disincentive to utility promotion of conservation; it does not by itself promote conservation. In order for California water users to successfully adopt sustainable water behaviors, robust conservation measures must be in place. Tiered water rates (IBRs) can be a helpful tool, but they must provide a sufficient price signal for customers to limit their water use. Utilities could be allowed to use rate structures with such shallow increases between tiers that customers are minimally or not at all motivated to reduce use because they do not even notice the difference in their bill. The CPUC could use price elasticities of demand for water to estimate the impact that various IBRs would have on water use. However, in order to know whether the estimated impact is sufficient, the CPUC will need a conservation target to compare it to.Long-Term Incentives Finally, although decoupling addresses short-term disincentives to conservation, it does not address longer-term disincentives that utilities may face. A utility might be able to grow its business in the long term by selling more water. Conservation measures, particularly those written into law in SBx7-7, might require IOUs to do the opposite, reducing their per-capita water sales. While decoupling protects utilities from short-term revenue losses within the rate-case cycle, it does not take away any incentive utilities might have to grow their business in the long term. Of course, there are other ways a utility can grow, such as serving more customers and investing in more sophisticated infrastructure. But if a utility’s strategy is to grow its business over the long term by selling more and more water to its customers, decoupling will not discourage it from doing so. To the extent that long-term incentives exist for utilities to sell more water, other regulatory mechanisms may be needed to enforce conservation goals such as those laid out in SBx7-7. Regulators could use the experience of the electricity industry to examine these long-term incentives, since the energy sector has used decoupling for thirty years. However, differences between the energy and water sectors must be heeded. Whereas long-term conservation pressures have led the energy sector to seek efficiencies and alternative fuels to meet conservation goals, in the water sector long-term pressures may be addressed through increasing capital intensity, e.g., by building wastewater recycling plants and desalination plants. These measures are not undesirable per se, but the CPUC’s policy decisions should explicitly consider such long-term consequences.CONCLUSION Because investor-owned water utilities regularly interact with their customers, the water users, they are well-positioned to promote conservation efforts. However, under traditional regulation, IOUs profit from increasing their water sales and lose money if they sell less than their adopted sales forecast. This throughput incentive puts the objectives of the IOU in conflict with conservation efforts. Revenue decoupling can help California achieve its water conservation goals by relieving this conflict. To meet these goals, the CPUC should expand its decoupling pilot program to include all IOUs under its regulation. Due to several concerns with decoupling, before doing so, regulators should take the following actions: Because decoupling itself is not a conservation program, the CPUC should evaluate the impact of IOU conservation programs to ensure that utilities are engaging in effective price and non-price conservation efforts. Since decoupling relieves IOUs of most revenue risk associated with sales fluctuations, IOU shareholders should no longer be compensated for these risks that they no longer bear. The CPUC should lower the allowed cost of capital for utilities with decoupling programs to account for the reduction in revenue risk. Finally, regulators should study the long-term conservation incentives for IOUs with decoupling.

Greg Leventis is a Master of Public Policy student at the University of California, Berkeley’s Goldman School of Public Policy. His policy focus is water and energy as they relate to conflict. He recently finished an internship at the California Public Utilities Commission working on water revenue decoupling, among other issues.John Erickson is a Master of Public Policy student at the Goldman School of Public Policy and a Master of Science student in environmental engineering at the University of California, Berkeley. He is interested in drinking-water infrastructure, particularly in the developing world. He recently finished an internship at the California Public Utilities Commission’s Division of Ratepayer Advocates. Research for this article was done by the authors while working as summer interns in the California Public Utility Commission’s (CPUC) Division of Ratepayer Advocates. However, the opinions expressed in the article are solely those of the authors and are not opinions or policies of the Division of Ratepayer Advocates.ENDNOTES 1. Lisa Bilir, CPUC Division of Ratepayer Advocates, “California Water Revenue Decoupling Pilot Programs,” presentation at NASUCA 2010 Mid-Year Meeting, slide 2, http://www.nasuca.org/archive/Bilir.ppt. 2. Office of Governor Arnold Schwarzenegger, “Gov. Schwarzenegger Takes Action to Address California’s Water Shortage,” press release, February 27, 2009, http://gov.ca.gov/press-release/11556/. 3. East Bay Municipal Utility District Board of Directors, “Regular Meeting Minutes of May 13, 2008,” 4–6. 4. California Department of Water Resources, California Department of Food and Agriculture, “California’s Drought: Water Conditions and Strategies to Reduce Impacts,” news release, March 30, 2009, 17–19, http://www.water.ca.gov/news/newsreleases/2009/040209droughtrpt-gov.pdf. 5. Ibid. 6. California Senate Bill SBx7-7, text. Legislative Counsel’s Digest Part 1, Chapter 2, Section b.1, http://info.sen.ca.gov/pub/09-10/bill/sen/sb_0001-0050/sbx7_7_bill_20091110_chaptered.html. The baseline for this goal is average per capita consumption over a ten-year period ending between 2004 and 2010. Since the goal is on a per-capita basis, if the state’s population grows, it is possible for the state to meet SBx7-7’s goals while simultaneously increasing its overall water use. 7. California Public Utilities Commission, “CPUC Addresses Water Supply in California,” http://www.cpuc.ca.gov/PUC/Water/WaterSupplyCalifornia.htm. 8. California Public Utilities Commission, “Water Action Plan,” December 15, 2005, p. 3, ftp://ftp.cpuc.ca.gov/PUC/hottopics/3water/water_action_plan_final_12_27_05.pdf. 9. CPUC Division of Water and Audits, “Standard Practice for Processing Informal General Rate Cases of Water and Sewer Utilities,” October 2007, http://docs.cpuc.ca.gov/published/Graphics/97754.pdf. 10. CPUC Water Division, “Rate Design for Water and Sewer System Utilities Including Master Metered Facilities,” Standard Practice U-7-W, July 2006, http://docs.cpuc.ca.gov/published/REPORT/113896.htm. 11. W. Shirley, J. Lazar, and F. Weston, “Revenue Decoupling Standards and Criteria: A Report to the Minnesota Public Utilities Commission,” June 30, 2008, p. 5, http://www.raponline.org/docs/RAP_Shirley_DecouplingRevenueRpt_2008_06_30.pdf. J. Eto, S. Stoft, and T. Belden, “The Theory and Practice of Decoupling,” Berkeley, CA: Energy and Environment Division, Lawrence Berkeley National Laboratory, University of California, Berkeley, 1994, 5–11, http://eetd.lbl.gov/ea/emp/reports/34555.pdf. Most, but not all, utilities face the throughput incentive. If a utility’s marginal cost of producing additional water is much greater than its average cost of production (perhaps because it must purchase additional water from an expensive source) the marginal cost may be greater than the marginal revenue it earns from selling additional water. This was the case with Suburban Water Systems, a California Class A water IOU. For that reason, Suburban did not institute full revenue decoupling when other California Class A water IOUs did. CPUC Decision 08-02-036, 25, http://docs.cpuc.ca.gov/word_pdf/FINAL_DECISION/79434.pdf. 12. Shirley, Lazar, and Weston 2008, 5. 13. S. Olmstead and R. Stavins, “Comparing Price and Non-Price Approaches to Urban Water Conservation,” Fondazione Eni Enrico Mattei, September 2008, http://ageconsearch.umn.edu/bitstream/42919/2/66-08.pdf. 14. Shirley, Lazar, and Weston 2008, 23. 15. California Urban Water Conservation Council, “Best Management Plan 11: Retail Conservation Pricing,” amended June 13, 2007, http://www.cuwcc.org/BMP-11-Rates.aspx. 16. Stephen St. Marie, “Effects of High Tiered Rates on the Financial Stability of Regulated Utilities and Necessary Regulatory Response, with Application to Water Utilities,” CRRI Western Conference, June 23–24, 2010. 17. In some cases, nonprofits, counties, or cities are well situated to promote conservation. For example, in Santa Clara Valley Water District’s territory, San Jose and other water utilities rely on the district for water conservation programs. Santa Clara Valley Water District, “Water Use Efficiency Strategic Plan, Phase 1,” September 2008, http://www.valleywater.org/Programs/Water_Conservation/Water_Use_Efficiency_Strategic_Plan_-_Phase_I.aspx. 18. National Association of Regulatory Utility Commissioners, “Decoupling for Electric and Gas Utilities: Frequently Asked Questions (FAQ),” Grants and Research Department, Washington, D.C., September 2007, 6. 19. CPUC Decision 08-08-030, August 21, 2008, 2, http://docs.cpuc.ca.gov/WORD_PDF/FINAL_DECISION/87061.pdf. 20. CPUC Decision 08-02-036, February 28, 2008, http://docs.cpuc.ca.gov/word_pdf/FINAL_DECISION/79434.pdf. CPUC Decision 08-08-030, August 21, 2008, p. 2, http://docs.cpuc.ca.gov/WORD_PDF/FINAL_DECISION/87061.pdf. 21. It is important to note that the MCBA tracks all changes in variable costs, not just those due to changes in the amount of water sold. For instance, if a utility’s electricity costs increase because it uses electricity less efficiently, the WRAM/MCBA will allow it to recover the cost increase from ratepayers. This is troubling, since it may remove the utility’s incentive to minimize its variable costs. 22. This description of the WRAM/MCBA mechanism is somewhat simplified. For a more detailed explanation, see CPUC Decision 08-02-036. 23. Underselling will not always result in an MCBA over-collection. If a utility’s per-unit variable costs increase substantially (because electricity prices rise, for example), the utility can still register an MCBA under-collection even though it produces less water than it planned to. 24. Bilir, slide 12. 25. Under-collection statistics are from Cal Water Advice Letter #1983 filed with the CPUC April 30, 2010. These statistics include only 21 of Cal Water’s 24 districts. We have excluded Antelope Valley, Kern River Valley, and Redwood Valley, three of the company’s smaller districts, because analyzing the under-collection data for them in the advice letter would have presented complexities that required more time than was available, and revenues were small relative to revenues in the larger districts that were included. 26. Investorwords.com, “Cost of Capital: Definition,” http://www.investorwords.com/1153/cost_of_capital.html. 27. CPUC Decision 09-05-019, May 7, 2007, 46, http://docs.cpuc.ca.gov/WORD_PDF/FINAL_DECISION/100837.pdf.